International Financial Management: Project Appraisal Techniques and Investment Decision

INTERNATIONAL
FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
a. The expected net present value...............................................................................................3
b. Standard deviation of net present value..................................................................................4
QUESTION 2...................................................................................................................................5
a. Calculation of expected NPV and SD of NPV........................................................................5
b. Chances that event will turn out to be more worse and probability of avoiding liquidation. .7
c. In case NPV is greater than positive that is £100m and its probability of occurring..............8
QUESTION 3...................................................................................................................................8
a. NPV for every project and ranking all the projects.................................................................8
b. Reason behind undertaking NPV as a superior method of project appraisal other than
internal rate of return (IRR)......................................................................................................10
c. Calculation of wisest allocation of the funds in order to achieve the optimum return that
each project will provide...........................................................................................................10
d. Calculation of probability of the product producing a negative NPV..................................11
CONCLUSION..............................................................................................................................13
REFERENCES..............................................................................................................................14

INTRODUCTION
International financial management is referred to as the management of the finance
within the international environment wherein trading and business is being undertaken in foreign
currency. The major aim of undertaking effective international financial management is wealth
maximisation. This is pertaining to the fact that when the finance will be managed in effective
and efficient manner then this will result in effective management of the finance all over the
globe. There are many aspect related to international financial management like the political risk,
foreign exchange, market imperfection and the enhanced opportunity set. The present report will
outline that how the different project appraisal techniques in order to evaluate which project is
better in investing and which is not. In addition to this the different between NPV and IRR will
also be highlighted along with calculation which is helpful in taking decision relating to
investment.
QUESTION 1
a. The expected net present value
Initial investment = 15000
Year 1
Returns Probability Expected
value
8000 0.1 800
10000 0.6 6000
12000 0.3 3600
Expected
value of
returns in
year 1
10400
Year 2

Returns Probability Expected
value
4000 0.3 1200
8000 0.7 5600
Expected
value of
returns in
year 1
6800
Present value of cash flows in year 1 = 10400 / [1/ (1+11%) ^ 1 ] = 9369.36
Present Value of cash flows in year 2 = 6800 / [ 1/(1+11%) ^ 2 ] = 5521.6
Present value of cash inflows = 14891
Net present value= Present value of cash inflow- initial investment
NPV- 14891- 15000= (109).
Interpretation- with the above calculation it is evident that the expected NPV of the project is -
109 and this reflects that the present value of the future cash flow is negative. Hence, this simply
means that the present project will be yielding a loss for the company in the near future (Madura,
2020). With this analysis of the data it is advisable to the company that they must not invest their
money into this project. The NPV to be negative might be because of the decrease in the amount
of return in year 2.
b. Standard deviation of net present value
Year 1
Returns
(X)
D = (X –
Expected value)
D2 Probability Probability * D2
8000 -2400 5760000 0.1 576000
10000 -400 160000 0.6 96000
12000 1600 2560000 0.3 768000